Sample Format of Security Agreement Format

Narendra Kumar

03 Sep, 2020

What is  Security Agreement?

Loans are always an important part of growing one’s business. Loans may be secured or unsecured. Security Agreement When a loan is secured, it means that a surety is attached to the repayment of the loan and the lender shall not entirely be at loss in the event a default occurs.

For loan transactions there are two primary documents:

• Promissory Note and
• Security Agreement.

A promissory note is borrower’s written promise to repay the loan and a security agreement document, for a secured loan, providing an interest in an asset to the lender in event of failure to repay the loan.

What is a ‘Security Agreement’?

Security Agreement is a document that provides the lender a security interest or a legal claim upon default in a specific property or asset that has been pledged as collateral. This mitigates the risk of default that the lender faces because in the event of a default, the collateral pledged may be sized and sold.

Security Agreement is usually drawn during a loan transaction. The borrower provides the lender with a security interest in certain assets which can be captured if the borrower defaults in making loan payments. The lender can then sell the acquired collateral to pay off the loan.

A default occurs when the debtor is not able to meet the schedule of debt repayment.

Collateral is a property or other asset that a borrower presents to the lender so as to secure the loan being taken.

What is required to be mentioned in a Security Agreement?

The security agreement should essentially be in great detail and every term mentioned must be unambiguous. The agreement is regarding the security interest in a property or asset which it holds a great value and thus the terms that deal with it must be precise and exact.

The following details must be part of the security agreement:

1. The details of the parties
   • the lender, who is the secured party
   • the borrower, who is receiving the consideration in form of a loan and in return is providing a security interest in form of legal claim in event of his default in repayment.
2. The original principal amount
   • The detail of the promissory note or any other loan agreement executed for the said consideration
3. The description of the asset or property is provided as a collateral
   • Collateral may a physical property or an intangible asset example copyright
   • The description must also include what interest are being provided for collateral, example: damages proceeds in respect of the property etc
4. The rights of the secured party
5. Description of the events of default example: the failure to perform any of the Obligations as per the loan agreement/ promissory note, any loss, theft, destruction, substantial damage, transfer or encumbrance of the Collateral, untrue, inaccurate or misleading representations and warranties made by the Borrower etc.
6. Action to be taken in event of default
   • The remedies that the lender is entitled to must be provided
     • Declaration of the due and payable amount
     • the right, without limitation, to sell, lease, or otherwise dispose of any or all of the Collateral
7. deducting all costs and expenses incurred in, or incidental to, the retaking, holding, advertising, preparing for sale, or the selling, leasing, or otherwise disposing of the Collateral, including, but not limited to, attorney’s fees, legal expenses, cost of any repair etc

• The governing law
• Jurisdiction

7. Provision as to who shall use and enjoy the collateral before any event of default occurs
   • It is mostly stated in the agreement that the right to use and enjoy the rights associated with the collateral shall remain with the borrower until an event of default as described in the agreement does not happen.
8. Warranties and representation
9. Notices
   • The registered address where the notices subject to the agreement shall be considered to be duly served.
10. Power of Attorney, if any, assigned
11. Binding upon whom
    • It may be stated that the agreement is binding upon the heirs, executors, administrators, successors, and assigns of the parties.
12. No waiver Clause:
    • No waiver by the secured party of any default shall operate as a waiver of any other default or of the same default on a future occasion.

What is the Benefit of Drawing a Security Agreement?

The security agreement i.e. a secured loan brings a level of surety to the lender and reduces the risk involved in the transaction.

For the borrower, the security agreement builds creditworthiness for the future business transactions.